Unformatted text preview: ent claim,
price of the state s Arrow security times the price of good k in the state s spot
It is easy to show (again, for you to show) that the relative prices across states
is the same as that under contingent claims. The same applies to relative
prices within each state.
A complete set of Arrow securities is sufficient to replicate the equilibrium
with full contingent claims. Here, we have K spot markets at Date 0 and at
each future state (for a total of 1
as well as the Arrow securities
traded at Date 0.
Arrow securities are really a special case of ordinary securities, i.e., securities
that pay off a state‐contingent amount of purchasing power at any particular
. If there
state. The return on ordinary security m is: ≡
are M ordinary securities, the payoff matrix can be written as: …
… ⋮ ⋮ i.e., the first column of represents the payoff of ordinary security 1, the second
column of ordinary security 2, ... . Reading across rows gives you how much one
would receive in each state if you...
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This document was uploaded on 02/07/2014.
- Winter '14